by Denis Del Bene, JD, LL.M. (RIA)
Alabama has enacted legislation establishing a factor presence nexus standard for business activity for purposes of the income tax, the business privilege tax, and the financial institution excises tax. (L. 2015, H49 (Act 505), effective for tax years beginning after 12/31/2014.)
Substantial nexus. Individuals who are residents or domiciliaries of Alabama and business entities that are organized or commercially domiciled in Alabama have substantial nexus with Alabama. Nonresident individuals and business entities organized outside of Alabama that are doing business in Alabama have substantial nexus and are subject to the income tax, the business privilege tax, and the financial institution excises taxes, when in any tax period, the property, payroll, or sales of the individual or business in Alabama exceeds certain thresholds.
Thresholds for substantial nexus. Substantial nexus is established if any of the following thresholds are exceeded during the tax period: (1) a dollar amount of $50,000 of property; (2) a dollar amount of $50,000 of payroll; (3) a dollar amount of $500,000 of sales; or (4) 25% of total property, total payroll, or total sales. At the end of each year, the Department will review the cumulative percentage change in the Consumer Price Index (CPI) and adjust the thresholds if the CPI has changed by 5% or more since January 1, 2015 or since the date that the thresholds were last adjusted. The adjusted thresholds will be rounded to the nearest $1,000. The CPI means the CPI for All Urban Consumers (CPI-U).
Pass-through entities. Pass-through entities, including, but not limited to, partnerships, limited liability companies, S corporations, and trusts must determine threshold amounts at the entity level. If property, payroll, or sales of an entity in Alabama exceeds the nexus threshold, members, partners, owners, shareholders, or beneficiaries of that pass-through entity are subject to tax on the portion of income earned in Alabama and passed through to them.
Property, payroll, and sales for purposes of the threshold. Property: Property counting toward the threshold is the average value of the taxpayer’s real property and tangible personal property owned or rented and used in Alabama during the tax period. Property owned by the taxpayer is valued at its original cost basis. Property rented by the taxpayer is valued at eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from sub-rentals. The average value of property will be determined by averaging the values at the beginning and ending of the tax period but the tax administrator may require the averaging of monthly values during the tax period if reasonably required to reflect properly the average value of the taxpayer’s property.
Payroll: Payroll counting toward the threshold is the total amount paid by the taxpayer for compensation in Alabama during the tax period. Compensation means wages, salaries, commissions, and any other form of remuneration paid to employees and defined as gross income under IRC §61.
Compensation is paid in Alabama if: (1) the individual’s service is performed entirely within Alabama; (2) the individual’s service is performed both inside and outside Alabama, but the service performed outside the state is incidental to the individual’s service inside the state; (3) some of the service is performed in Alabama and: (a) the base of operations or, if there is no base of operations, the place from which the service is directed or controlled is in Alabama, or (b) the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the individual’s residence is in Alabama.
Sales: Sales counting toward the threshold include the total dollar value of the taxpayer’s gross receipts from transactions in the current period, from: (1) the sale, lease, or license of real property located in Alabama; (2) the lease or license of tangible personal property located in Alabama; (3) the sale of tangible personal property received in Alabama as indicated by receipt at a business location of the seller in Alabama or by instructions, known to the seller, for delivery or shipment to a purchaser, or to another at the direction of the purchaser, in Alabama; and (4) the sale, lease, or license of services, intangibles, and digital products for primary use by a purchaser known to the seller to be in Alabama.
If the seller knows that a service, intangible, or digital product will be used in multiple states because of separate charges levied for, or measured by, the use at different locations, because of other contractual provisions measuring use, or because of other information provided to the seller, the seller must apportion the receipts according to usage in each state. If the seller does not know where a service, intangible, or digital product will be used or where a tangible will be received, the receipts will count toward the threshold of the state indicated by an address for the purchaser that is available from the business records of the seller maintained in the ordinary course of business. If that is not known, then the receipts will count toward the threshold of the state indicated by an address for the purchaser that is obtained during the consummation of the sale, including the address of the purchaser’s payment instrument, if no other address is available.
Taxpayers subject to special apportionment methods: For a taxpayer subject to special apportionment methods, the property, payroll, and sales for measuring against the nexus thresholds will be defined as they are for apportionment purposes under those special apportionment methods and associated regulations.
Financial institutions: Financial institutions subject to an apportioned income tax must determine property, payroll, and sales for nexus threshold purposes the same as for apportionment purposes under Chapter 16 (Financial Institutions Excise Tax) of Title 40 of the Alabama Code.
Interaction with Federal Interstate Income Law (Public Law 86-272). The legislation provides that a state without jurisdiction to impose tax on or measured by net income on a particular taxpayer because that taxpayer comes within the protection of Public Law 86-272, 15 11 U.S.C. § 381, does not gain jurisdiction to impose such a tax even if the taxpayer’s property, payroll, or sales in the state exceeds a threshold. Public Law 86-272 preempts the state’s authority to tax and will therefore cause sales of each protected taxpayer to customers in the state to be thrown back to those sending states that require throwback.